Friday, 27 January 2012

So you need cash now...?

Watching the #ITVtonight Twitter stream after yesterday’s programme, I could not help but notice how many people were rude about people who use short-term credit. This does not help.

Often someone who never thought they would need a quick fix loan thinks they are not weak or foolish enough to be caught out. When they are, they become too scared to tell anyone. Perhaps they too would have said rude things if it had not happened to them.

Feeling stupid stops people from seeking help and this is dangerous. You see, if you took out a short-term loan, then found it a struggle to repay, feeling that you could not ask for help, you might take out another loan or simply accept the charges to save face.

As an ex-bankrupt, I am well aware how you may feel about people like me not paying back debts. But the thing is, short-term lending is attracting all sorts of people who are operating illegally - some are out and out criminals, others get rich quick on the internet types.

Can you think of me as reformed character?  Would you accept my advice as a way of paying my dues?  Even if you are really sure of how to manage your money and that you’ll never get into debt, would you bookmark this page, just in case?  I’d like to save you a few quid.


Step 1 - OMG I need cash now

Think about what you need money for.  If it’s a one off expense like burst pipes or a replacement tyre, then a loan may ease your pocket, provided you can afford the repayment. This might be because you are about to change job and get a pay rise, or are owed a tax rebate.  Otherwise, you will have to find the repayment out of your day to day money and live frugally for a few weeks.

If you need the loan to repay other debts, or to cover day to day living costs, then the chances are that you have a “structural deficit” in your budget and you need to get your expenses under control. This does not always mean that you spend too much on silly things. It can mean you’re paying too much for insurance or energy, for instance.

Sometimes, you can shop around for lower cost goods and services, then work out a new budget yourself and it is always a good idea to keep working at this every couple of months or so. It is, after all, your money and you do need to have control over it, otherwise somebody else will!  

However, if you have a responsibility like caring for family or looking for work, your time might be scarce. Similarly, if you feel unsure of yourself, it makes sense to get help. Visit our planning and support pages to try out a range of tools, then choose the ones that you find easiest to use. Almost all of them are free and those that aren’t cost no more than a few pounds.


Step 2 – Getting the best loan deal

Short-term credit is expensive. If you think about it – and whilst you may need to borrow quickly, you should think about it carefully – no business is going to risk lending money to people who may not pay it back. The only way to cover that risk is to charge for it and that’s why we see loans charged at around £30 for every £100 borrowed. Some people are okay with that, others are not.

To avoid paying high charges for a loan, it makes sense to be sure of lending before you need the money, rather than to start looking for lending as soon as you need it.  If you know that mainstream lenders may not help you, the best way to safeguard against unexpected costs is to join a Credit Union where you live or where you work.

Credit unions require you to start saving before you can borrow, and most allow you to borrow once you have started to save around £20 a month for two or three months. Usually, you can borrow three times what you have saved so far, so after three months you might be able to borrow around £150. This will increase as you save more.


Step 3 - Still need the money now?

Sometimes there is no alternative to finding extra cash quickly. Do ask friends and family. The cost of living affects everyone and your loved ones will surely prefer to see you saving money. Lendfriend has some excellent informal loan agreements you can adapt. However, do not under any circumstances allow friends or family to guarantee money that you have borrowed from a formal lender as this could put them at risk.

If there is no one to ask for an informal loan, then is it time to consider a short-term lender. Remember this market has some big brand names and an awful lot of lookalike brand names, so be sure you are dealing with a company that offers clear and fair terms. Then and only then, are you safe to compare costs.


Step 4 – Flog, tarry, avoid

Our top tips of what to look for in a short-term lender are as follows:

1. A postcode that you can tap into CCA search to check that they hold a consumer credit licence. This should read either consumer credit (meaning that they actually lend the money) or credit broker (meaning that they shop around for loans for you). Watch our video if you need help. If you cannot find a licence, they are operating illegally and you can flog their behinds, by reporting them.

2. Look to see if there is a responsible lending policy on the website, perhaps on its own page or the FAQ page. Does this information help you to understand exactly when you will need to repay your loan, how much you will need to repay, how they will collect the repayment and what happens if they cannot collect it. Are you confident that they will check your income, employment and credit history? These companies specialise in difficult circumstances and responsible lenders will check everything first. If all this information is clear, tarry, in other words add them to a shortlist of companies you might use.

3. Check that the Terms & Conditions and Privacy Policy do not force you to accept communications by letter, email, phone call or text from third parties. This allows other people to keep sending you promotions for more loans, insurance, claims and all sorts, so you need to find an opt-out box in the application form before you agree to anything. Terms and policies can be very long and confusing. If you cannot find what you are looking for assume the worst and simply avoid the company.


Step 5 – Keep costs down

It is tempting, when you are applying for a loan to ask for that little bit extra. Remember that short-term loans are not like the easy credit we enjoyed before the credit crunch. For every tenner you add the company will add around £3 more in charges. So if you bump £350 up to £500 your charges will increase from £105 to £150. If you can cut back on your spending while you borrow the cash, you will be better off, so think about the smallest amount you need to borrow, before comparing the charges between your shortlisted lenders. 

And finally? If for any reason at all the company cannot collect your repayment, contact them immediately to explain or question the problem. If the problem is yours contact an independent advice agency also. For ease, try National Debtline, or the links in these posts.


Author, Emma Bryn-Jones is the founder and a director of the Zero-credit Coop.

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